Company History:

Sterling Chemicals, Inc. was, in 1995, a major producer of seven petrochemical products. Its Canadian subsidiary was a major producer of sodium chlorate for the pulp and paper industry and the leading supplier of large-scale chlorine dioxide generators for this industry. Although not yet a decade old, the company had experienced a roller-coaster ride typical of enterprises engaged in the volatile, energy-related petrochemicals field. It was put up for sale in early 1996.

Early History

Sterling Chemicals, Inc. was founded in 1986 to acquire and operate Monsanto Co.'s petrochemical plant in Texas City, Texas. The purchase was completed on August 1, 1986. The cost, $213 million, was financed partly by a syndicate of banks led by Chase Manhattan Bank, which provided a public offering of $120 million of subordinate notes and $140 million in credit.

The Texas City facility was on a 250-acre site on Galveston Bay, about 45 miles from downtown Houston, where Sterling Chemicals established its corporate headquarters. Production from the plant consisted of acrylonitrile, styrene monomer, lactic acid, acetic acid, tertiary butylamine, and plasticizers. These chemicals, through intermediate products, became integral elements in finished goods such as synthetic fibers, coatings and adhesives, plastics, and synthetic rubbers used in many household and industrial applications.

Sterling Chemicals was founded on the premise that there was a "window of opportunity" for the chemicals produced at the Texas City complex because of rising demand and no new manufacturing capacity in the offing. Gordon A. Cain, leader of Sterling Group Inc., the investor group that founded the chemical company and chairman of Sterling Chemicals' board, was a retired chemical-industry executive who acquired several chemical complexes from major companies during the recessionary period of the early 1980s. He owned 10.8 percent of the stock at the end of 1994; J. Virgil Waggoner, president and chief executive officer of the company from its inception, owned 8.2 percent.

"As long as oil was selling for $30 a barrel," Cain told a Houston Post reporter, "there was a trend to build plants like this in Saudi Arabia." But, he continued, as a result of lower oil prices, which even fell below $10 a barrel in 1986, "There's no incentive to build competing plants in that part of the world." Cain also foresaw that the new venture would benefit from the lower cost of petroleum feedstocks (because of the lower price of crude oil) that served as Sterling Chemicals' raw material and from a weakening dollar, which would make the company's products more competitive in the world chemical markets.

Contributing to Sterling Chemicals' low costs was a small corporate staff with minimum layers of management and a cooperative work force. Company officials established an employee stock-ownership plan and later, a profit-sharing plan, in order to gain greater productivity from a highly unionized labor force with strict work rules and a long history of adversarial relations with management. About 12 percent of the common stock was held by employees in 1988. The company was contributing, in 1990, 60 cents for every dollar employees put into the stock-option program.

The new company had an anchor client in Monsanto, which was paying Sterling Chemicals a fee and a share of the profits to convert its petroleum feedstocks. The Texas City facility was the only one in the United States producing synthetic lactic acid, a preservative, and tertiary butylamine, used significantly by Monsanto in rubber production. Within a year of Sterling Chemicals' founding, the prices of its two main products--styrene monomer and acrylonitrile--had risen. For its first fiscal year (ended September 30, 1987), the company reported revenues of $413.2 million and net income of $47.4 million. The long-term debt of $187.3 million had been reduced to $116 million. Total common stockholders' equity had increased from $5.1 million to $52.4 million. Results were so good in Sterling Chemicals' initial year that its board approved a voluntary distribution to its employees that came out to be about $2,500 each.

Success Leads to Expansion

Fiscal 1988 was a year of spectacular success for Sterling Chemicals. The company reported revenues of nearly $699 million and a whopping net income of $213.1 million. Long-term debt dropped to $86.3 million, while stockholders' equity rose to $90.6 million. Sterling Chemicals ranked first for the year among all Fortune 500 companies in return on assets and second in return on sales. The company attributed its outstanding performance to a favorable supply/demand situation, availability of raw materials at reasonable costs, the relatively weak dollar, lack of easily substitutable materials, and a healthy world economy. Shortly before October 1988 Sterling Chemicals became a publicly traded company, its stock listed on the New York Stock Exchange. Stockholders sold 12.65 million shares (more than 20 percent of the stock outstanding) at $16 a share in the initial public offering.

A program of expansion also was under way. BP Chemicals America Inc., a U.S. subsidiary of British Petroleum Co., was working with Sterling Chemicals to increase its acrylonitrile capacity by 55 percent and its acetic acid capacity by a minimum of 100 million pounds a year. A sodium cyanide facility also was being constructed at the Texas City site, by E.I. du Pont de Nemours and Co. Sterling Chemicals reported that much of its production was committed through long-term contracts with companies like BP Chemicals and Du Pont. enabling it to lower working-capital requirements for raw materials and inventories and to lower its overhead by dispensing with the need for a sales force and many other staffers. A company executive told Barron's that its selling and administrative costs were only one-quarter those of most competitors. In 1990 the company had an entire corporate staff of only 22 and a marketing department of only six.

Revenues fell to $580.8 million in fiscal 1989, and net income to $103.9 million. During the year available supplies of styrene monomer (Sterling Chemicals' major product) and acrylonitrile increased while demand weakened, resulting in price declines from what had been unprecedented levels. The dollar strengthened appreciably, reducing demand for Sterling Chemicals' product line overseas. There was a general slowdown in the housing and automobile industries, and fashion changes resulted in decreased demands for acrylic fibers. Sterling Chemicals' income-to-sales ratio of 18 percent remained enviable, and its stock reached a record high, exceeding $18 a share. However, the company was entering a downward spiral that would not end until 1994.

Setbacks in the Early 1990s

During fiscal 1990 Sterling Chemicals' revenues fell to $506 million and its net income to $59.1 million. A severe freeze along the Texas Gulf Coast in December 1989 resulted in a two-week shutdown of the company's production and some degree of impairment for up to two months. The Iraqi invasion of Kuwait in August 1990 disrupted the styrene market as prices for raw materials escalated rapidly. The worldwide market for acrylonitrile continued to be affected adversely by the weakening in the East Asian market for synthetic fiber, particularly acrylic fiber. However, Sterling Chemicals announced completion of three projects: the modernization of its styrene monomer plant, an increase in the capacity of the acrylonitrile plant, and expansion of the acetic acid facility. By August 1990 Sterling Chemicals had spent about $150 million to upgrade its production facilities.

During fiscal 1991 revenues rose to $542.7 million, but net income dropped to $36.8 million. Management cited oversupply in the petrochemical industry, including the opening of new styrene plants in the Far East, and declining demand as the reasons for lower profitability. A cogeneration project was under construction as a joint venture with a subsidiary of Union Carbide Industrial Gases, Inc., in order to provide added supplies of steam and electricity. This facility was completed in 1992.

Sterling Chemicals suffered a loss of $5.9 million in fiscal 1992, its revenues plummeting to a five-year low of $430.5 million. Management cited worldwide oversupply of styrene monomer and a shutdown of acrylonitrile production for routine maintenance. It also reported that a profit would have been earned except for a one-time charge for prior years recognizing liability for post-retirement benefits.

In August 1992 Sterling Chemicals purchased the pulp-chemical division of Albright & Wilson, a division of Tenneco Canada, Inc., for about $302 million. The acquisition included four Canadian facilities for the production of sodium chlorate, used in the bleaching of pulp for the manufacture of paper. It also included ERCO Systems Group, which was licensing and constructing large-scale generators to convert the sodium chlorate into chlorine dioxide as an environmentally preferred alternative to elemental chlorine in pulp bleaching. In making this purchase Sterling Chemicals raised its long-term debt from $72.6 million to $300.2 million.

Sterling Chemicals increased its fiscal 1993 revenues to $518.8 million because of $119.3 million from the newly acquired pulp-chemical business. The company suffered its second consecutive annual loss, ending $5.4 million in the red. Its stock sank to a record low of $3.50 a share during the year. Management noted that, with three styrene monomer plants being constructed in East Asia and one in Europe, supply for the chemical seemed likely to exceed demand for several more years. It also said demand for acrylonitrile from export customers had weakened. The pulp-chemicals business was profitable despite lower demand than forecast, attributed to the recessionary North American economy.

Market Improvement in the Mid-1990s

The fortunes of Sterling Chemicals turned around in 1994. Revenues increased to a solid $700.8 million, and net income was $19.1 million. The company said that demand for its petrochemical products, including styrene monomer, had grown significantly during the year, primarily because of a healthier world economy. Sterling Chemicals' pulp-chemical plants were operating near full capacity at the end of the fiscal year. Eight ERCO Systems generators started up in 1994, and several more were under construction in China.

Sterling Chemicals' pride in its impressive environmental and safety record was shaken in May 1994, when an ammonia leak in one of its Texas City plants sent nearly 1,400 people to a local hospital for treatment. Eight of them were hospitalized. Officials determined that the leak was caused by a worker mistakenly turning a valve that controls hot-water flow to an ammonia vaporizer.

In the best performance by Sterling Chemicals since it became a public company, revenues reached a record $1.03 billion in fiscal 1995, and net income came to more than $150 million. Strong worldwide demand and market growth from global economic expansion benefitted sales of both styrene monomer and acrylonitrile. High North American demand led to record production and sales volume of chlorine dioxide, derived from sodium chlorate. Royalty revenues from installed generator technology also grew. During the fiscal year the company's major customers were British Petroleum and its subsidiaries, accounting for 16.5 percent of revenues, and Mitsubishi International Corp., accounting for 12.6 percent. Revenue from exports came to nearly 52 percent of the total, with Asia accounting for 64 percent and Europe for 36 percent.

During the fiscal year Sterling Chemicals reduced its long-term debt by $89 million, to $103.6 million. The company obtained a $275-million bank-credit facility, and the pulp-chemicals unit received a separate $60-million credit facility. Most of this new financing was earmarked for a three-year, $200-million capital-spending program. Under construction at Texas City in 1995, in conjunction with BP Chemicals, was an expansion of acetic acid capacity and a world-scale unit for the production of methanol. About half the methanol would be used as a raw material for the production of acetic acid, with the rest available to BP. A partial-oxidation unit by Praxair, Inc. would refurbish Sterling Chemicals' existing synthesis gas reformer, freeing it for methanol production. This unit also would convert natural gas into carbon monoxide and hydrogen for use in the production of acetic acid and plasticizers.

Also under construction in 1995 was Sterling Chemicals' first sodium chlorate plant in the United States. The 110,000-ton-per-year facility in Valdosta, Georgia, would be the company's second largest for this purpose and would increase its capacity to produce this chemical by 30 percent. Production was scheduled to begin in December 1996.

Sterling Chemicals announced on January 29, 1996, that it had entered discussions with a number of third parties with respect to the possible sale of the company in a single transaction or a series of related transactions. Shares of the stock immediately rose 35 percent, from $9.25 to $12.50 a share. Employees and directors owned about 30 percent of the stock in 1995.

Operations in the Mid-1990s

At the end of fiscal 1995 Sterling Chemicals' 290-acre facility in Texas City included one of the world's largest units for the production of styrene monomer, with an annual capacity of more than 1.5 billion pounds. This unit accounted for more than one-third of the company's total chemical production capacity and for about 11 percent of total domestic capacity of this chemical. Derivatives of styrene monomer, a raw material, were being used in the production of foam products such as ice chests, residential sheathing, egg cartons, insulation, and protective packagings; housings for computers, telephones, videocassettes, small home appliances, and automotive parts; and for tableware, luggage, packing, toys, textile products, and synthetic rubber products.

Sterling Chemicals' annual production capacity of acrylonitrile was in excess of 700 million pounds. It was the second largest domestic producer of the chemical, with about 31 percent of total domestic capacity. Produced using ammonia, air, and propylene as raw materials, it was being used in synthetic fibers for apparel, rugs, and blankets; in polymer products for casings for ice chests, hard luggage, calculators, telephone handsets, and computers; in automotive parts; and for synthetic rubber products.

Sterling Chemicals' share of domestic capacity for acetic acid production came to 13 percent and was scheduled to reach nearly 800 million pounds annually with the completion of the expansion of the unit. Produced using methanol and carbon monoxide as raw materials, its largest use was in the production of vinyl acetate. BP Chemicals was marketing the unit's production. The company's plasticizer capacity was about 280 million pounds a year. Its plasticizers were being used in producing flexible vinyl plastics for consumer products and building materials. BASF Corp. was marketing Sterling Chemicals' plasticizers.

Sterling Chemicals was the only domestic producer of synthetic lactic acid, with an annual capacity of 19 million pounds. It was being used as a preservative for food products, for the manufacture of acrylic enamel, for silk finishing, and in intravenous solutions. The company was also the only U.S. producer of tertiary butylamine, and one of only three worldwide, with an annual capacity of 21 million pounds. This chemical was being used for silicone caulk, in tires and hoses, and as a chemical intermediate. It was being purchased and resold by Flexys, a joint venture of Monsanto and Akzo Nobel N.V. The company's annual capacity of sodium cyanide was 100 million pounds. It was being used for electroplating and to enhance the recovery of precious metals. The unit was operated by Sterling Chemicals but owned by Du Pont, which marketed its output.

Sterling Chemicals' revenues from pulp chemicals came to $143.95 million, or 14 percent of the company total, in fiscal 1995. Its net income came to $9.7 million, or 6.4 percent, of the company total. Sterling Pulp Chemicals, Ltd. was the second-largest supplier of sodium chlorate to the North American pulp and paper industry, with about 20 percent of the market. It had headquarters in Toronto and held four manufacturing plants: at Buckingham, Quebec; Grand Prairie, Alberta; Thunder Bay, Ontario; and Vancouver, British Columbia. These plants had a combined capacity of about 350,000 tons. The Georgia facility under construction would increase capacity by more than 30 percent. The Buckingham facility also was producing small amounts of sodium chlorite, using sodium chlorate as a raw material. Sodium chlorite was being used as an antimicrobial agent in water treatment, as a disinfectant for fresh produce, for treatment of industrial waste water, and for oil field microbe control.

Sterling Pulp Chemicals' ERCO Systems Group was licensing, designing, and overseeing construction of large-scale generators at pulp-mill sites. These generators were converting sodium chlorate to chlorine dioxide for the bleaching of kraft pulp. ERCO had supplied about two-thirds of the generators in use worldwide.